Bombay High Court
The Municipal Corporation Of Greater ... vs Thermal Engineering Corporation, ... on 25 July, 1996
Equivalent citations: 1997(1)BOMCR353, 1997(1)MHLJ700, 1997 A I H C 2316, 1997 BOM LR 99 617, (1997) 2 CIVLJ 782, (1997) 1 MAH LJ 700, (1997) 2 ICC 685, (1997) 2 ARBILR 361, (1998) 2 BANKCAS 15, (1996) 4 ALLMR 247 (BOM), (1997) 1 BOM CR 353
JUDGMENT Dr. B.P. Saraf, J.
1. This appeal is directed against the judgment and order dated 12th December, 1994 of the learned single Judge dismissing the Arbitration Petition No. 127 of 1991 filed by the appellants.
2. The material facts of the case, briefly stated, are as follow : In the year 1978, tenders were invited by the appellants, the Municipal Corporation of Greater Bombay ("Corporation"), for installing the crematorium furnaces in Bombay. In pursuances of the above tender invitation, tender has submitted by the respondent No. 1, Thermal Engineering Corporation, on 1st February 1979. The Corporation accepted the said tender and issued the work order on 2nd November 1979. As per the work order, respondent No. 1 was required to complete the construction of two crematorium furnaces within 11 months. The respondent No. 1, however, could not start the work because of the strike resorted to by the sand suppliers, which continued till October 1980. During this interregnum, the prices of the materials covered by the work order escalated. Under those circumstances, the respondent No. 1 wanted to terminate the above contract and accordingly, by its letter dated 13th October, 1981, requested the Corporation to terminate the same. In reply, on 7th April, 1982, the Corporation requested respondent No. 1 to set up only one furnace instead of two as contemplated by the original contract. The above offer of the Corporation was accepted by the respondent No. 1 on 16th October, 1982. The respondent No. 1 there upon installed the furnace in terms of the modified contract. The Corporation also, on its part, made payments to the respondent No. 1 from time to time under the above contract. The respondent No. 1, however, made certain additional claims which were not acceptable to the appellant Corporation. One of the claims was a claim for an amount of Rs. 5,96,815.50 on account of 69% increase in the rates over and above the escalation permissible under the escalation clause contained in the contract. The appellant Corporation rejected the above claims of the respondent No. 1. Thereupon, the respondent No. 1 asked the Commissioner of the Corporation to refer the dispute regarding the amounts payable to the respondent No. 1 to arbitration under Clause 96 of the general conditions of the Contract. The Corporation, accordingly referred the dispute to arbitration on 31st October, 1988. The award was made and published by the arbitrator on 4th April, 1991.
3. The Corporation challenged the award by filing an arbitration petition under Section 30 of the Arbitration Act, 1940 ("the Act") before the learned single Judge of this court and challenged the award of 690% increase in the rates which amounted to Rs. 5,96,815.50, in addition to a sum of Rs. 4,95,550/- under Clause 75 of the general conditions of the contract which provided for escalation of the cost, on the ground that respondent No. 1 was entitled only to escalation under Clause 75 of the contract and no other amount on account of rise in the cost of material or labour etc. The case of the Corporation before the learned single Judge was that the claim of 69% escalation in addition to escalation under Clause 75 of the general conditions of the contract was illegal inasmuch as Clause 75 specifically barred any such claim. The learned single Judge field that, in the facts and circumstance of the case, the respondent No. 1 was entitled to claim 69% escalation over and above the escalation permissible under Clause 75 of the general conditions of the contract as, in his opinion, Clause 75 did not operate as bar to such claim. The learned single Judge also observed that the arbitrator having consumed Clause 75 in that manner and that being one of the possible views, it was not open to him to go into the reason given by the arbitrator.
4. We have carefully considered the judgment of the learned single Judge. The contention of the appellant Corporation is that Clause 75 of the general conditions of contract contains a complete bar on payment of any amount to the contractor over and above the escalation provided under the said clause. According to Mr. R. D. Dhanuka, the learned counsel for the appellant Corporation, the arbitrator misconducted himself in allowing the claim for the extra escalation at the rate of 69% which was contrary to the specific provisions contained in Clause 75 of the general conditions of the contract debarring any such claim and the learned single Judge erred in confirming the same. Mr. Samdani, the learned counsel for the respondents, on the other hand, submits that in view of the peculiar facts and circumstances of the case, unprecedented rise in the cost of labour and material and the delay in execution of the contract, the respondents are entitled to the claim escalation over and above the escalation provided for in Clause 75 of the general conditions of contract. The contention of the learned counsel is that in any view of the matter the allowance of the claim depends upon the construction of Clause 75 and the arbitrator having allowed the claim on construction of the same, the Court cannot go into the same and even if it holds a different view on interpretation of the said clause, it cannot hold that the arbitrator misconducted himself in allowing the claim.
5. We have carefully considered the rival submissions of the counsel for the parties. There is no dispute in this case about the fact that the claim of 69% escalation which has been allowed by the arbitrator is over and above the claim for escalation permissible under Clause 75 of the general conditions of contract. Clause 75 of the general conditions of contract, which provides for reimbursement/refund on variation of price of labour and materials, reads as follows :
"75. Reimbursement refund on variation of price of labour and materials.
The Contractor shall be reimbursed or shall refund to the Corporation as the case may be the variation in the value of the work carried out from time to time, depending on whether the prices of materials and labour as a whole rise or fall, and the method adopted for such computations shall be as given below, it being clearly understood that the contractor shall have no claim for being reimbursed on the ground that the price of a particular material or group of materials have risen beyond the limits of the presumption made in the following paras, nor shall the Corporation have any right to claim refund on the same grounds; nor will any variation be allowed on the grounds of rise in sales tax, Octroi or any other Govt. duties.
*** *** *** ***"
It is clear from the above clauses that a contractor is entitled to be reimbursed on account of variation of the value of the work carried out from time to time depending upon the rise in the prices of materials and labour. He is also liable to refund to the Corporation in the event of fall in the prices. The variations for this purpose have to be computed by adopting the method set out in paragraphs (a) and (b) thereof Paragraph (a) lays down the method of computing the cost of materials, while paragraph (b) deals with the method of computing the variations of cost of labour. It is also made clear in the above clause that the contractor shall have no claim for being reimbursed on the ground that the price of a particular material or group of materials have risen beyond the limits of the presumptions made in the paragraphs set out in th said clause. Identical bar is applicable on the right of the Corporation to claim refund. The question that arises for consideration is whether in allowing the additional claim of 69% escalation, the arbitrator has travelled beyond Clause 75 of the general conditions of the contract and awarded the claim in breach or contravention of the same or he has interpreted the said clause and granted the claim on such interpretation.
6. Law is well-settled that an arbitrator is not a conciliator and cannot ignore the law or mis-apply it in order to do what he thinks just and reasonable. He is a tribunal selected by the parties to decide their disputes according to law and so he is bound to follow and apply the law, and if he does not, he can be set right by courts provided his error appears on the face of the award. It is equally well settled that where it is apparent not by construction of the contract but by merely looking at the contract that the arbitration travelled outside the permissible territory and thus exceeded his jurisdiction in making the award, it is an error going to the root of his jurisdiction. The arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract. His sole function is to arbitrate in terms of the contract. He has no power apart from what the parties have given him, under the contract. If he has travelled outside the bounds of the contract, he has acted without jurisdiction. But if he has remained inside the parameters of the contract and has construed the provisions of the contract, his award cannot be interfered with unless he has given reasons for the award disclosing an error apparent on the face of it. A conscious disregard of the law of the provisions of the contract from which he has derived his authority vitiates the award.
7. As observed by the Supreme Court in Associated Engineering Co. v. Govt. of Andhra Pradesh , an arbitrator cannot widen his jurisdiction by deciding a question otherwise than in accordance with the contract. He cannot say that he does not care what the contract says. He is bound by it. It must bear his decision. He cannot travel outside its bounds. If he exceeds his jurisdiction by so doing, his award would be liable to be set aside. In any event, the arbitrator is bound to act within his jurisdiction and decide within the parameters of the contract. If while doing so, he commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract, he commits a jurisdictional error. The arbitrator cannot over-step the confines of the contract. He cannot wander outside the designated area. He cannot disregard the allotted task. He cannot disregard the limits and provisions of the contract. He cannot award claims which are opposed to the provisions of the contract. If he does so, the award would be liable to be set aside on the ground that he misdirected and mis-conducted himself in allowing the claims. An arbitrator who acts in manifest disregard to the contract acts without jurisdiction. His authority is derived from the contract and is governed by the Arbitration Act, which embodies principles derived from a specialised branch of law of agency. A deliberate departure by the arbitrator from contracts amounts to not only manifest disregard to his authority or a mis-conduct on his part, but it may tantamount a mala fide action. A conscious disregard to the law or the provisions of the contract from which he has derived his authority vitiates the award.
8. Reference may be made in this connection to the decision of the Supreme Court in Alopi Prasad v. Union of India , where referring to the provisions of the Indian Contract Act, it was pointed out that the said Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. The Supreme Court at p. 595) quoted with approval the following passage from speech of Lord Simon in British Morietonews Ltd. v. London and District Cinemas Ltd. (1952 AC 166).
"The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events, which they did not at all anticipate a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point-not because the court in its discretion think it just and reasonable to qualify the terms of the contract, but because on its the construction it does not apply in that situation. When it is said that in such circumstances the court reaches a conclusion which is just and reasonable Lord Wright in Constantine Steamship Line Ltd. v. Imperial Smelting Corporation Ltd. (1942 AC 154 (186)) or one which justice demands Lord Sumner in Hirji Mulji v. Cheong Yue Steamship Co. Ltd. (1926 AC 497 (510)) this result is arrived at by putting a just construction upon the contract in accordance with an implication ...................... front the presumed common intention of the parties."
9. In Alopi Parshad (supra), the Supreme Court categorically held that the arbitrators were not justified in ignoring the express terms of the contract prescribing remuneration payable to the agents and in proceeding upon the basis of quantum merit. While saying so, the Supreme Court observed (at p. 594) :
"There is no general liberty reserved to the Courts to absolve a party from liability to perform his part of the contract, merely because on account of an uncontemplated turn of events, the performance of the contract may become onerous. That is the law both in India and in England, and there is, in our opinion, no general rule to which recourse may be had ............ relying upon which a party may ignore the express covenants on account of an uncontemplated turn of events since the date of the contract."
It was in the light of the above observations that in Alopi Prashad (supra) the Supreme Court held the award of the arbitrators awarding additional expenses to the agent as erroneous. While doing so, the Supreme Court observed that where the contract for purchasing ghee required by the Army personnel expressly stipulated for payment to the Agents, of charges at rates specified in the contract under the head 'establishment and contingencies', the award of the arbitrators, on a general reference, awarding additional expenses under that head is, on the face of it, erroneous, granting that additional expenditure under that head had been incurred on account of the abnormal rise in prices."
10. In Thwardas v. Union of India , in view of an express stipulation in the contract which relieved the Government from all liability on account of loss caused to the contractor for damage to unburnt bicks, the Supreme Court held that the contractor was not entitled to claim anything as price of katcha bricks and that the arbitrator went wrong in law in awarding the same. It was observed (at p. 472) :
We are clear that the arbitrator went wrong in law. Government departments have their difficulties no less than contractors. There is trouble with labour there is likelihood of machinery breaking down in out of the way places and so forth, there was also the danger of thunder storms and heavy showers of rain in the month of May, it will be remembered that the last date of delivery was 25-5-1996.
If with that in view, Government expressly stipulated, and the contractor expressly agreed, that Government was not to be liable for any loss occasioned by a consequence a remote as this, then that is an express term of the contract and the contractor must be tied down to it. If he chose to contract in absolute terms that was his affair.
But having contracted he cannot go back on his agreement simply because it does not suit him to abide by it."
It was held that in view of Clause 6 of the contract which expressly relieved the Government on account of all liability under the head of claim "loss of katcha bricks ..........", the arbitrator was wrong in awarding any sum on that account.
11. Reference may also be made to the decision of the Supreme Court of Continental Construction Co. Ltd. v. State of Madhya Pradesh . In that case, Clauses 2.16 and 2.4 of the contract stipulated that the contractor had to complete the work inspite of rise in prices of materials and also rise in labour charges at the rates stipulated in the contract. There was a clear finding of the arbitrator that the contract was not rendered ineffective in terms of Section 56 of the Contract Act due to abnormal rise in prices of material and labour. In such circumstances, it was held that the contractor having completed the work, it was not open to him to claim extra cost towards rise in prices of materials and labour. The Supreme Court, therefore, held that the arbitrator misconducted himself in not deciding the specific objection raised by the State regarding the liability of the extra claim of the contractor and in that view of the matter upheld the order of the High Court setting aside the award and refused to interfere with the same.
12. It is also expedient at this stage to refer to a recent decision of the Supreme Court in State of U.P. v. Ramnath International Construction (P) Ltd. where deciding with the scope and ambit of the jurisdiction of the court to interfere with an arbitrator, it was observed by Pattanaik J. that the arbitrator being a creature of the agreement is duty-bound to enforce the terms of the agreement and cannot adjudicate a matter beyond the agreement itself It was held that if the arbitrator adjudicates a claim of a contractor with reference to the clauses of the agreement itself, whereby the agreement gets engrafted into the award, it will be open to the Court to examine those clauses of the agreement and find out the correctness of the conclusion of the arbitrator with reference to those clauses.
13. Bearing in mind the aforesaid principles, we may now examine the legality of the award in hand so far as it pertains to award of a sum of Rs. 8,09,145/- on account of claim No. 1 for increase in the rates of materials supplied and works carried out by the contractor. Admittedly, the respondents had claimed a sum of Rs. 11,02,365.36 towards escalation/price variation and claimed interest of Rs. 6,13,024.20 thereon. The above claim of Rs. 11,02,365.86 included a sum of Rs. 5,96,895.50 towards 69% increase in the rates over and above the general escalation of Rs. 4,95,550.36 under clause 75 of the general conditions of the contract. The above claim of Rs. 5,96,895.50 was made on the ground of unprecedented increase in the prices of material and labour. This claim of the respondent No. 1 was opposed by the appellant Corporation on the ground that such a claim was specifically barred under Clause 75 of the agreement. The case of the appellant Corporation before the arbitrator was that the respondent No. 1 was entitled to escalation on account of increase in the price of material and labour only to the extent set out in the above clause. Such escalation has to be computed in the manner laid down in paragraphs (a) and (b) thereof It was contended that in view of the specific prohibition contained in the above clause, the contractor was not entitled to anything more on any account including unprecedented rise in the price of materials and labour, if any, over and above what was permissible under the said clause. The arbitrator awarded a sum of Rs. 8,09,417/- towards the price variation against the first claim. This amount obviously includes the amount claimed by way of escalation under Clause 75 of the agreement as well as further escalation claimed on account of unprecedented rise in the price of materials and labour. No bifurcation has been given by the learned arbitrator of the amount allowed as escalation and as additional escalation claimed by the contractor. The arbitrator has allowed certain other claims also which are, however, not the subject matter of disputes between the parties.
14. The award of the arbitrator was challenged by the Corporation before the learned single Judge in so far as it pertains to allowance of the claim of the appellant on account of escalation over and above the escalation permissible under Clause 75 of the agreement. The learned single Judge while hearing the arbitration petition observed that because of the delay in completion of the work, the appellant was entitled to raise demand of 69% increase in the price of materials and labour and the arbitrator having allowed the same on construction of Clause 75 of the agreement, it was not possible for him to interfere with the award of the arbitrator as the view taken by the arbitrator on the construction of Clause 75 of the agreement was one of the possible views. By this appeal the Corporation has challenged the above order of the learned single Judge.
15. We have carefully considered the award and the order of the learned single Judge. We have perused Clause 75 of the contract which provides that the contractor shall be reimbursed the variation in the value of work carried out from time to time depending on whether the prices of materials and labour as a whole rise or fall, and the same shall be computed by adopting the method set out in the said clause. There is no dispute about the fact that it is specially stated in the said clause to which the parties to the contract had agreed, that the contractor shall have no claim for being reimbursed on the ground that the price of a particular material or group of materials had risen beyond the limits of the presumptions made in the paragraphs (a) and (b) of the said clause dealing with the method of calculation. Obviously, the claim of 69% escalation over and above what is permissible under Clause 75 of the agreement is contrary to the prohibition contained in Clause 75 of the agreement. The question is whether on the face of such a prohibition, the arbitrator can award any claim in addition to what is permissible under the said clause. The law is well-settled that the arbitrator is duty bound to arbitrate in the terms of the contract. He has to remain inside the parameters of the contract. It is equally well-settled that if the arbitrator adjudicates a claim with reference to the clauses of the agreement itself the agreement gets engrafted into the award and it is open to the Court to examine those clauses of the agreement and find out the correctness of the conclusion of the arbitrator with reference to those clauses. In the instant case. Clause 75 is quite clear and unambiguous and not open to diverse meanings. There is no scope of interpreting the same. In such a case, the question of construction of the same cannot arise. The only question that arises for consideration is whether on the fact of prohibition contained in Clause 75 of the agreement, the arbitrator can award any escalation over and above what is permissible under the said clause. The answer obviously has to be in the negative. The arbitrator in this case has ignored the prohibition contained in Clause 7 of the contract and has widened his jurisdiction by deciding the claim of the contractor otherwise than in accordance with the said clause. He has exceeded his jurisdiction by doing so. He is bound to decide within parameters of the contract. He has committed a jurisdictional error in allowing the claim of respondent No. 1 contractor over and above the claim permissible in Clause 7 of the contract. He has over-stepped the confirms of the contract by disregarding the limits and provisions of Clause 75 of the contract and misdirected and misconducted himself in allowing the claim for additional escalation which is opposed to the provisions of the contract. We are therefore, of the clear opinion that the learned arbitrator exceeded his jurisdiction in allowing the claim of the contractor for additional escalation over and above the escalation permissible under Clause 75 of the agreement. The claim and escalation under Clause 75 was for a sum of Rs. 4,95,500.00. The arbitrator has awarded a sum of Rs. 8,09,417/- which obviously includes additional escalation claimed by the contractor. No bifurcation has been given by the arbitrator of this amount under the two heads of claims, viz., (i) escalation under Clause 75 and (ii) additional escalation over and above that. In normal circumstances, we would remitted the award to the arbitrator to bifurcate this figure and restrict his award to the extent of the claim allowable under Clause 75 of the contract. However, as the dispute pertains to a contract carried out in the year 1981 and the award is dated 4th April, 1991, in our opinion, remitting the award back to the arbitrator at this juncture will frustrate the very object of the arbitration as a means of settlement of disputes. In our view, the appropriate course in such a situation is to modify the award in so far as it pertains to the allowance of a sum of Rs. 8,09,417/- on account of escalation of prices of materials and labour and reduce the same to Rs. 4,95,550/- which is the amount claimed by the contractor under Clause 75 of the agreement. Accordingly, we intend to modify the award by reducing the claim awarded under item No. 1 from Rs. 8,09,417/- to Rs. 4,95,550/-.
16. In the result, the appeal is allowed. The impugned order dismissing the Arbitration petition No. 127 of 1991 is set aside. Consequently, the decree passed in terms of the award is also set aside. The award in respect of the claim under item No. 1 only is modified by reducing it from Rs. 8,09,417/- to Rs. 4,95,550/-. The rest of the award is upheld. The Arbitration Petition No. 127 of 1991 is accordingly disposed of. Judgment is pronounced and decree passed in terms of the award as modified above. The appeal is accordingly disposed of with no order as to costs.
Learned counsel for the respondents prays that the appellants have already deposited the disputed amount in this Court which they should not be allowed to withdraw for a period of three months from today. Prayer is allowed.
17. Appeal allowed.